How to Predict Where the Market Will Open

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How to Predict Where the Market Will Open

When you sit down for breakfast on any given weekday, you’re likely to hear a pundit remark something like, “Markets are set to open higher” or “We anticipate markets to fall down at the start.” Hearing these forecasts may make you question how these experts can foretell the future and why investors care about the market’s opening direction.

After all, the closing price shows you how much money you made or lost in your portfolio that day. There’s more to the backstage narrative than you would think.

Key Takeaways

  • When the markets shut for the day in the afternoon, trading stocks comes to an abrupt end, creating hours of uncertainty between then and the following day’s start.
  • Predicting where the market will restart trading at the open may help investors hedge risk and put bets on the price movement the following day.
  • After-hours trading in stocks and futures markets may give a peek, but it is less liquid and more volatile than during normal trading hours.
  • Investors turn to other markets that are open when the US is closed, as well as economic statistics given by governments or numbers released by firms, for a more complete picture.

Predicting the Likely Direction of theMarket Open

Before we go into why some investors constantly monitor the open’s expected direction, let’s take a look at a few signs that might assist them.

While the financial markets have clearly defined working hours, events outside of those hours continue to impact the value of securities as well as investor behavior. Natural catastrophes and geopolitical crises, for example, may strike at any moment. Events such as a sitting president’s assassination or a big terrorist assault are likely to signal a much lower market open.

Corporate data is equally important. Earnings announcements issued by significant corporations after the close or before the open may have an impact on the market’s direction. The great majority of companies disclose their quarterly results in January, April, July, and October. When a bellwether business releases good news, the stock market opens higher, while negative news might have the opposite impact.

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Other significant news is released before the markets open. At 8:30 a.m., a comprehensive range of economic statistics, including employment figures, retail sales, and GDP figures, is published. Once again, both good and negative news might influence the market’s opening direction.

After-Hours Trading

Trading activity after hours is a consistent predictor of the following day’s open. Extended-hours trading in equities occurs on electronic marketplaces known as ECNs both before and after the financial markets open for the day.

Such behavior may assist investors in predicting market direction. Indeed, indicators such as the Nasdaq-100 Pre-Market and After-Hours Indicators are explicitly developed to follow extended hours activity for this reason.

Index futures, which trade practically 24 hours a day, may also predict how the market would likely move at the start of the following session. Money managers often utilize S&P 500 futures to either hedge risk over a certain time period by selling the contract short, or to boost their stock market exposure by purchasing it.

Futures markets, unlike the stock market, seldom close. Futures contracts are traded based on the prices of the underlying stock market benchmark indices. S&P 500 futures trade on the value of the S&P 500, much as Dow futures trade on the value of the Dow Jones Industrial Average.

Because the stocks in each of the benchmark indexes reflect a distinct market sector, understanding the direction of pricing on futures contracts for those indexes may be used to forecast the direction of prices on the real securities and markets in which they trade. If the S&P futures are going downward all morning, stock prices on US exchanges are expected to fall when trading resumes. The inverse is also true, with increasing futures prices implying a higher open.

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Aside from providing market access nearly 24 hours a day, one important advantage of futures is their high liquidity level after-hours as compared to equities traded on ECNs. This liquidity allows for smaller spreads, which is important since the greater the spread, the more a transaction must move in your favor merely to break even.

How International Markets Can Influence the Open

International markets are open and trading while local markets are closed for the day. A positive day in Asian markets may indicate that US markets will open higher. Devastating losses abroad might result in a reduced open at home.

Domestic investors might anticipate the direction of local markets when they open for the day by paying attention to overseas happenings. The major stock markets in Tokyo, Frankfurt, and London are often utilized as predictors of what will happen in the United States.

Serious market observers get up early, grab the data, and utilize these many indicators individually and in combination to forecast the direction of the opening movements in the US market. Less ambitious investors just monitor social media mood or tune in to morning financial news programs to hear the talking heads deliver an update on the day’s expectations. In any case, it is feasible to obtain a reasonably accurate feel on what to anticipate when US trading opens for the day.

Why the Direction of the Open Is Important

The market’s direction provides opportunities. If markets are expected to grow, individual stock values are likely to climb as well. Short-term traders may use the information to make buy/sell choices. For example, if markets are expected to climb and a technological firm delivers excellent news before the opening bell, the stock of that business is likely to appreciate at the open.

For investors who own the stock, this might be a signal to sell and lock in gains. If you don’t own the stock, it might be a hint to purchase early and sell later in a rising market. Remember that if you simply have a few dollars to invest, watching market direction may be pointless.

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On the other hand, if you can purchase 100,000 shares that raise two cents apiece, you might profit $2,000 in an hour (ignoring transaction expenses). If you can purchase 500,000 shares that climb 10 cents, you can earn $50,000 quickly, and the numbers continue to grow from there. Big institutional traders may make a lot of money on these changes. In this day and age of lightning-fast computerized trading, even price movements of a fraction of a penny may result in large rewards for deep-pocketed traders who make the correct decision.

The Bottom Line

Predicting the initial movements of the stock market may be a beneficial technique. If your forecast is correct, you have a chance to profit. The first stage, of course, is to properly predict market direction. That step is insufficient to generate revenue.

To earn money, you must also choose an investment and accurately predict the influence of the market’s movement on your investment. You may make an incorrect prediction about the market’s direction, and the market may go against you.

Even if you get the path right, you must also get the investment right in order to make a profit. Simply said, there are no assurances that you will choose the proper path or that your investment will be profitable.

Before betting on the direction of the open, like with any investing plan, you should do a comprehensive study while knowing your approach and its ramifications.

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